● BNMreduced the Statutory Reserve Requirement (SRR) ratio by 100 basis points (bps) tomatch a nine-year low of2.00%, effective 20 March

- The cut was expected, though it was more aggressive, exceeding our initial expectation of a 25 to 50bps cut.

- SRR ratio was previously cut by 50bps to 3.00% in November 2019.

- During the Global Financial Crisis (GFC), BNM cut SRR by 50bps to 3.50% in November 2008. Then subsequently by 150bps in February 2009 to 2.00% followed by 100bps to 1.00% in Marchbeforeraisingit back to 2.00% in April 2011.

- Up until 31 March 2021, Principal Dealers are granted flexibility to recognise Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) of up to RM1.0b as part of the SRR compliance.

● SRR solely as an instrument to manage liquidity

- Similar to its previous statement, BNM reiterated that “the SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy.”

- The above measures will release an estimated RM30.0b (1.9-2.0% of GDP) worth of liquidity into the banking system, compared to only about RM7.0-8.0b in the November 50bp SRR cut.

● An applaudable move amidst risingliquidity concern in thecapitalmarketas the country grapples with the COVID-19 pandemic

- We view the SRR ratio cut as timely, providing a much need liquidity into the banking system and additional buffer for banks to possibly allow deferment or further relaxation to loan obligations of parties affected by the pandemic.

- The move helps to weather the ongoing episode of elevated capital outflows due to COVID-19 fears and domestic political instability, whereby the capital market recorded the largest net outflow of foreign funds in 10 months (-RM10.1b) in February, after a sustained inflow in the preceding three consecutive months (Jan 20: RM3.4b).

● We maintain our view thatthe BNM couldembark on 25 to 50bps OPR cut anytime prior to orat the next MPC meeting in May. Plus, it still has scope to further cut the SRR to avert a liquidity shock.

- Growth outlook remains grim and uncertain, attributable to the COVID-19 pandemic, oil price collapse and a change in government.

- Combined with synchronous monetary easing move by major and regional central banks, BNM has ample room to lean further towards an expansionary monetary policy. As such, we foresee another 50bps rate cutin the near term, bringing the OPR to 2.00%, its lowest since the GFC in 2008-09.

- Similarly, we also believe that BNM still has scope to cut the SRR by up to 100bps to as low as 1.00% as it did in March 2009 to provide ample liquidity in the financial system during the GFC and avert a liquidity crunch.

Source: Kenanga Research - 20 Mar 2020